Buying Brazil (Part V): Foreign Companies Benefiting From Brazilian Growth

Includes: AVP, EWZ, FNDSF, HAL
by: Nicholas Pardini

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There are many excellent opportunities to invest in Brazil through ADRs. However, some investors may want protection from the currency risk, more exposure to the consumer discretionary sector than Brazilian ADRs offer, or may have more caution toward emerging markets stocks. In this column, I highlight the foreign companies based in the US or Europe that benefit the most from the growth of Brazil and its consumer society.

- Fiat is the leading auto producer in Brazil controlling 25% of the market share. In fact, car sales have surpassed Fiat's previously leading market (Italy) in 2010, to become the company's number one customer. Brazil's drivers have helped the company surge back to profitability after struggling most of the previous decade. However, Fiat's outlook outside of Brazil is concerning. Fiat's sales have declined in Europe (even its home country Italy) and the EU still consists of 67% of the company's revenues. Fiat's debt level is ten times higher than industry average without including the company's stake in Chrysler. Overall, Fiat has the leading car brand in Brazil, but whether this is enough to carry the company past its struggles in Europe is too early to determine.

Avon Products (NYSE:AVP)
- Brazil has the world's leading market for cosmetics. With demographic trends skewing toward aging females, Brazilians are spending an increasing amount on cosmetic products that they previously could not afford. Avon has performed solidly and pays out a 3% dividend yield while having 45% return on equity. However, Avon has some notable risks. Currently, Avon is being investigated
for a bribery probe in Brazil, China, and other countries that most likely involved attempting to prevent regulation against its direct selling model. Sales have been declining consistently in the US and recently in China as well.

Halliburton (NYSE:HAL) - Halliburton provides oilfield services and drilling technology to oil producers around the world. In Brazil, Halliburton is working with Petrobras (NYSE:PBR.A) to maximize the efficiency of the country's deep water oilfields. On its own merits, Halliburton is a strong company with an estimated earnings growth of 22.83% over the next five years and a PEG ratio of only 0.88. Whether the price of oil rises or falls, oil producers will use Halliburton's services to maximize the output of their reserves. With President Obama's recent support of expanding drilling in the US, recent oil discoveries in South Dakota, that require horizontal drilling, and the company's involvement in increasingly used natural gas, Halliburton has strong US growth to match its operations in Brazil and many other locations internationally.

I believe the best way to invest in Brazil is to buy Brazilian companies directly through the stocks I have recommended in previous entries of this series. However, for those who prefer "safer" American and European names, this list provides some of the multinationals that have the most exposure to Brazil. Out the three above, I would only recommend buying Haliburton because the fundamentals are strong outside of Brazil as well. While Avon and Fiat are doing well in South America, the rest of their business is struggling. Another alternative I recommend for investors who do not trust a single stock in Brazil is to simply buy the iShares Brazil ETF (NYSEARCA:EWZ).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.